Sunday, June 15, 2008

PTPTN loans - some practical solutions

For those who don't know, PTPTN loans are low cost loans given by the government to students studying at universities in Malaysia. I've always supported the government's moves to track down those who fail to repay their PTPTN loans. If the default rates continue at the current rate, the allocation given to PTPTN might be used up pretty soon.

The loan default runs into many millions of taxpayers dollars and puts the viability of this program in jeopardy. Which makes me ask these questions - why is the default rate so high and is PTPTN the best vehicle to channel these loans?

I don't know what the exact default rate is like but it has to be pretty serious for PTPTN to consider pretty drastic measures to track down those who fail to repay their loans. Some of the measures proposed includes blocking their passports and blacklisting them on credit bureaus which would make it difficult for them to take out housing and car loans.

My sense of why the repayment rate might be low is that those who take out the loans don't think that the government will go after them if they fail to pay back their loans. There is a feeling that the government is too inefficient to go after them or that the government simply doesn't care about them not paying the loans back. After all, many JPA scholars do the same, don't they? Furthermore, there might be a sense of entitlement that I deserve a scholarship to go to university and as such I shouldn't be made to pay back this 'loan'.

Which brings me to the 2nd question. Is PTPTN the best organization to be in charge of managing these loans? Would, for example, giving this responsibilities to banks a better solution?

One of the reasons why these loans are taken up by the government is because banks would not want to give out loans to students who can only pay them back in 3 or 4 years time. Furthermore, these PTPTN loans are subsidized in that they have low or no interest rates (in addition to a management fee) on the grounds of encouraging potential students to attend university and by doing so, provide a public good for the country.

Given this market failure, would it not make sense if the government were to subsidize these loans through banking institutions who have a much better infrastructure to manage these loans (and to collect on them)?

Anyone who is familiar with the credit collections process would be able to tell you that it is a very tricky process requiring dedicated resources and creative ways of pressuring those who have not paid their loans to pay up. I have no reason to think that the PTPTN civil servants are in a better position to chase down these loan defaulters compared to professionally trained staff in private banks who are given financial incentives to chase down loan defaulters. Given this, wouldn't it make more sense from an administrative and efficiency point of view to subcontract loans to university students to the financial sector instead of keeping it as a government function?

If PTPTN does not want to let go of the whole loan giving business, there is also the option for it to subcontract the process of chasing down loan defaulters to recognized credit collection agencies.

Long term, the government has to rethink its role in giving loans to potential university students given that a larger and larger proportion of the population is going to institutions of higher education. I personally don't think that what they are doing now is sustainable. Although there are a lot more complexities involved, I think it makes more sense for the government to allow the private sector to take over this responsibility stepping in only to provide some sort of guarantee or financial subsidy for these financial institutions to give out these loans to students who will only be able to repay them after a lag period.

After all, most banks in developed countries make a good profit from making student loans to potential students, many of them without having any government subsidy or guarantee. Without significant changes, I don't see how Khalid Nordin, the Minister for Higher Education can achieve an 80% repayment rate for PTPTN loans.